How to interpret the structure of a currency pair?
How to interpret the purchase and sale price?
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Forex trading can be a bit confusing for those who are just beginning to learn about forex trading. This is because each transaction represents a simultaneous purchase and sale operation, that is, two different positions.
In the foreign exchange market the currencies quote in pairs; This is why when a person opens a purchase order on a currency, automatically, he is selling another one. The pairs, as the name implies, are composed of two coins, coded by three letters.
The first currency in a pair is known as the base currency while the second is called a quoted currency. For example, in the next EUR / USD pair, the EUR (euro) is the base currency while the USD (dollar) is the quoted currency.
At any time, the price of a pair shows the amount of quoted currency needed to acquire a unit of the base currency. If the current exchange rate of the EUR / USD is $ 1.1525, this quote indicates that the value of € 1 (euro) is $ 1.1525 (dollars).
If the trader takes a long position on this pair, this means that he would be buying euros and selling dollars. On the contrary, if you take a short position, you would be effectively selling euros and buying dollars.
By convention, when talking about taking a long (buy) or short (sell) position on a pair, reference is always made to the base currency. The opposite operation would be carried out on the quoted currency.
As a general rule, you should buy a currency if you think it will go up or sell it if you think it will depreciate, as simple as that.
On trading platforms you will always find two prices for each pair you consider; a purchase price (ask) and a sale price (bid). The difference between both prices is known as the spread and it is the broker’s profit, that is, the cost of the transaction. The wider the spread, the more expensive the cost of operating. The spread is determined by the price and liquidity providers in the market at that exact moment.
In the image below you can see that the purchase price of EUR / USD is 1.16468 while the sale price is 1.16462. This means that when buying a euro we would pay 1.16468 dollars, while when selling a euro we would receive 1.16462 dollars.